Over the past four years, Greece’s economy has contracted by 18.4%. Predictions are that it will shrink by another 4% in 2013. The austerity without stimulus approach is throwing the country into a 1930s-like downward spiral.
This Website Is For Financial Professionals Only
Greece has €300 billion in bailout programs it has to pay back. That’s the largest loss of output from a developed country in over 30 years.
The US economy declined by 27% between 1929 and 1933.
The severe austerity mandates accompanying Greece’s rescue funds are causing tax collections to dwindle, defeating the intended purpose of cutting costs.
Cuts in spending are a mandate in these types of situations. Implementing such cuts without also instituting new growth policies gives no choice but to accept external aid.
The experience of the Great Depression shows that economic growth must be stimulated for the spending cuts to work.
The economy in Germany contracted 34% during the Depression and resulted in Adolph Hitler becoming chancellor in 1933.
In Greece, an anti-foreigner party with a symbol similar to a swastika gained 18 seats in the parliament.
The International Money Fund (IMF) also recently revised its fiscal multipliers. This means that cuts now risk three reducing output three times as much as originally estimated
and is causing revenue to fall and deficits to increase.
So far, none of the cuts have enabled Greece to begin functioning on its own fiscally, much less to pay back any of its enormous and growing debt.